Invitae's (NVTA) CEO Randy Scott on Q4 2015 Results - Earnings Call Transcript

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Invitae (NYSE:NVTA)

Q4 2015 Earnings Conference Call

February 9, 2016 4:45 PM ET


Katherine Stueland - Communications and Investor Relations

Randy Scott - Chief Executive Officer Co-founder

Lee Bendekgey - Chief Financial Officer and General Counsel

Sean George - President and Chief Operating Officer


Doug Schenkel - Cowen and Company

Patrick Dennehy - JPMorgan

Amanda Murphy - William Blair & Company, L.L.C.

Kevin Chen - Leerink Partners LLC.


Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to InVitae’s 2015 Year-End Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I will now turn the call over to Katherine Stueland. You may begin your conference.

Katherine Stueland

Thanks, Mike, and good afternoon, everyone. Thank you for joining us for our 2015 year-end earnings call. Joining us today are Randy Scott, our Chairman and CEO; Sean George, our President and COO; and Lee Bendekgey, our CFO.

Before we begin, I’d like to remind you that various remarks that we make on this call that are not historical, including those about our future financial and operating results, our plans and prospects, the focus of our business strategy, market opportunities, feature product services, our product pipeline and the timing thereof demand for and reimbursement of our services, and our investment and our infrastructure and operations constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

We refer you to our 10-Q for the quarter ended September 30, 2015, in particular to the section entitled Risk Factors, for additional information on factors that could cause actual results to differ materially from our current expectations. These forward-looking statements speak only as of the date hereof and we disclaim any obligation to update these forward-looking statements.

With that, I will turn the call over to Randy.

Randy Scott

Thanks, Katherine, and good afternoon, everyone. 2015 was a foundational year for us at Invitae, as we hit all the major milestones we set out at the start of the year. And as we look to 2016 by the end of this year, we’ll be close to our goal of aggregating all the world’s medically relevant genetic tests into a single service with better quality, faster turnaround time, and a lower price than most single gene diagnostic tests of the past. That will serve as the foundation for all future genetic testing for Invitae to help us bring genetics into mainstream medicine to help billions of people.

In 2015, as you may recall, we identified four metrics by which you can measure our success. First, reducing COGS; second, increasing content; third, increasing volume; and lastly, increasing cash and reimbursement. I’d like to start the call by highlighting our accomplishments on each of these four metrics.

First, we made significant reductions in our cost of goods in 2015, and expect to be below $500 per sample by the end of 2016, and keeping with our stated goal of 50% gross margins for our long-term business model.

As for content, we increased our menu almost threefold in 2015, and we expect to end the year with approximately 3,000 genes in production due to a significant expansion across neurology and pediatric genetics, as well as rare diseases.

With regard to our third metric, we exited the year with a run rate of approximately 32,000 samples per year, based on approximately 8,000 samples in Q4, leading us to project our volume for 2016 at between 50,000 to 70,000 samples. We expect this volume growth will be driven by multiple factors, including sustained growth in gastric cancer, accelerating growth in cardiology and neurology, new offerings in pediatric genetics and rare disorders, and the expansion of our sales force. We expect the non-cancer volume to grow significantly throughout 2016, as we continue to expand our content across multiple diseases.

We believe another factor in our volume growth is quite simply the brand we are building. Comprehensive high-quality genetic testing at an affordable price is a brand that resonates with clinicians, patients, and payers. For example, this month we’re launching what we believe is the world’s most comprehensive pediatric cancer panel, covering childhood, solid tumors, hematologic tumors, and brain tumors, while eliminating genes that would be inappropriate for childhood testing.

Over 15,000 children each year are diagnosed with cancer. You can imagine how much this motivates our employees and our customers to be able to provide what we see is the world’s most comprehensive high-quality test for pediatric cancer at prices that families and payers can afford. We have one remaining important barrier to climb on our path to positive cash flow and that’s reimbursement. And that barrier is one we intend to resolve in 2016.

The cost of healthcare arguably has never been more central to our nation’s future. With the presidential election upon us, the rising cost of drugs will no doubt continue to be debated. One of the things that sets Invitae apart is a business model that actually offers payer significant cost savings. We expect to see steady incremental growth in reimbursement throughout 2016 with improvements across three key segments; third-party payers, institutional payers, and patient pay.

Securing third-party payment for our tests, starting with Medicare, is one of our main objectives for this year in order to shift the positive gross margins. We made significant progress in 2015 by publishing two peer review papers and signing our first contracts with institutions and third-party payers.

In 2016, we will focus on expanding our network of contracted payers, starting with Medicare, where we’ve been working closely with Medicare’s MolDX program administered by Palmetto.

In Q4 of 2015, we submitted our tech assessment data package to Palmetto as one of the first genetic testing companies to go through the MolDx tech assessment program for germline panel testing. We believe that by working with the Medicare program, Invitae can help set quality standards for the industry that would be recognized by private payers as well. We believe that Invitae value proposition in terms of quality, price, and utilization management is exactly the right approach for payers in an era of rising healthcare costs.

So, in summary, we will continue to measure our success in 2016 by the four metrics we outlined a year ago. So to reiterate for 2016 business objectives we announced earlier this month, we’re planning to reduce the cost of goods sold to under $500 per report, expand content to include approximately 3,000 genes in production by the end of the year, deliver between 50,000 to 70,000 billable tests, secure reimbursement for Medicare patients by the Center for Medicare or Medicaid services and from top payers, generate revenues exceeding the cost of revenue by the fourth quarter of 2016, and pilot our first programs in genome management with the launch of an adult prevention panel intended for healthy adults who wish to learn more about their risk for common, actionable genetic conditions.

These goals are important for our growth in 2016 and beyond, as we continue to provide high-quality affordable genetic testing options to the millions of individuals suffering from genetic disorders. They are also foundational to the success of the second phase of our business, which we’ll talk about later in the call.

I will now hand the call over to Lee to talk about our 2015 financial results and key drivers for financial performance in 2016.

Lee Bendekgey

Thanks, Randy. On last quarter’s earnings call, we said that we expected cash burn to remain more or less constant in 2015 and begin to decline in 2016. Our strategy for moving towards positive gross margins and eventually positive cash flow is to improve collections, drive down COGS, and managing our – and manage our operating expenses carefully to reduce cash burn and over time generate positive cash flow. We expect the results of this strategy to show benefits in 2016.

In the first-half of the year, we’re focusing our research and development efforts on our content and COGS reduction efforts. We’ll similarly streamline our marketing programs with a goal of reducing our non-COGS related operating expenses in the second-half of 2016. This will be challenging given our planned additions to our sales force in the first-half of the year and volume related additions required in organizations like production and client services. We’re nevertheless committed to these expense management strategies, as a key to our progress toward positive cash flow. To that end, we plan to hold non-volume related headcount essentially flat during 2016.

The second key element of this strategy is to achieve our goal of reaching positive gross margins in Q3 or Q4 of 2016. The combination of positive gross margins and savings in non-COGS related operating expenses will amount to an inflection point that we expect will allow us to begin reducing our burn in the second-half of this year. It also should position us to achieve more significant reductions in cash burn in 2017, as we continue to drive volume growth and the resulting growth in gross profits absorb increasing percentages of our non-COGS related operating expenses until we achieve positive cash flow.

As an example, with an average cost per test of under $500 and the blended average revenue per test of $800 to $900 from our patient, institutional, and third-party customers, we would achieve break-even, given our current non-COGS operating expenses at annual volumes of between 200,000 and 300,000 billable tests.

Turning to our 2015 result, the total billable value of tests delivered in Q4 was $8.7 million. Our revenue in the quarter was nearly $3.2 million, an increase of approximately 261% over the same quarter last year. For fiscal 2015, our revenue totaled about $8.4 million, representing an increase of 422% over 2014. Our revenue in Q4 includes an accrual of approximately $360,000, representing the beginning of our transition to recognizing revenue on an accrual rather than a cash basis.

As a reminder, under generally accepted accounting principles, we’ve historically recognized revenue, as cash has been received from our customers. When recognized on a cash basis, our revenue in any quarter is derived largely from tests delivered in prior quarters. Under our revenue recognition policy, we’re required to begin accruing revenue, where we have a contract with the customer and we’ve established a history of collecting material payments from that customer.

In Q4, we began to recognize revenue from a small segment of our institutional customer base. Over the coming quarters, we expect to begin recognizing revenue on an accrual basis from additional customers with whom we’ve entered into contracts and established the payment history.

In addition to the private insurance payers with whom we begun to contract, as of December 31, we had active contracts with 41 institutional customers. With respect to COGS, our average cost per test report this quarter was under $700 per test compared to a cost of under $750 per test last quarter, and an average cost per test in 2014 of about $1,500. As a reminder, our calculation and the average cost per test report is based on a number of samples accessioned in the quarter. In Q4, we accessioned about 8,000 samples.

In the fourth quarter, we incurred operating expenses, excluding the cost of tests delivered of $21.9 million of which about 20% were general and administrative expenses, 52% were research and development expenses, and 28% were commercial expenses.

As of December 31, 2015, our cash, cash equivalents, restricted cash and marketable securities had a total value of $131.8 million. This represents a reduction of $20.3 million as compared to the end of Q3. Going forward, we plan to continue to focus on limiting growth in operating expenses, driving down our COGS, growing volume and driving revenue. These will be the keys to beginning to generate positive gross margins and reducing cash burn in the second-half of 2016, enabling us to reach the inflection point in which the scale of our business drives more rapid reductions in cash burn, as we work to reach positive cash flow with our current capital.

I’ll now turn the call over to Sean, who will describe our progress on our four key metrics in 2015 and provide guidance on our expectations for 2016.

Sean George

Thanks, Lee. As we’ve discussed in the past, the best way to measure execution against our model is to follow our progress and lowering our COGS, increasing content, driving volume, increasing reimbursement and collections. In 2015, we reduced our COGS from around $1,200 at the beginning of the year to under $700 per sample in Q4. This came both as a result of volume growth and from our continued investment in production infrastructure to scale effectively, reducing costs in sample processing and medical interpretation, while meeting the highest standards of quality.

We plan to continue driving down COGS in 2016 to below $500 by the end of the year. Given our ambitious content goals for the year, we do not expect this to be a linear path. But given our lineup of improvements to our production process, we expect to exit 2016 at this level or below, enabling us across the gross margin kind of a point and keeping us on a clear path to positive cash flow.

We now offer one of the most comprehensive, highest-quality, and certainly most affordable menus for cancer and cardiovascular inherited genetic testing. We’ve been encouraged by key opinion leader reaction to our cardiovascular offering and look forward to serving this important and large patient population as a key part of our business in 2016.

In cancer, we’ve rounded out our pancreatic cancer and pancreatitis offering and we’ve just added the pediatric solid tumors panel, the pediatric hematologic malignancies panel, and a pediatric nervous system in brain and tumors panel to our menu, enabling us to be one of the few companies providing the comprehensive genetic information useful in diagnosing children who might be among the 15,000 per year afflicted with the pediatric cancer.

In the first-half of 2016, we expand – we plan to expand our production capabilities to offer a menu test from 1,000 genes worth of content in production. We will soon be able to offer broad testing for neuropathies, myopathies, and muscular dystrophies, and we’ll build out this neurology test menu over the course of this year.

We also plan to add broad affordable pediatric testing, starting with comprehensive panels for multiple congenital malformation disorders. In these clinical areas, clinicians typically toward [ph] a multiple genes or tests to get a clear diagnosis, wasting precious time on a diagnostic odyssey and incurring costs to the healthcare system and to patients directly, which are avoidable with our offering.

Other clinical areas to be added, include ophthalmology, dermatologic, and sex determination disorders, congenital heart malformations, laterality disorders, and other specific syndromes broadening the pediatric population we can conserve with what we believe to be unprecedented quality and affordability. One example of the many disease areas for which our breadth and affordability is a game changer is primary ciliary dyskinesia.

The PCD foundation estimates that more than 25,000 people in the United States have this inherited genetic disease. It is surely the major driver of their quality of life and healthcare spend, and less than 400 know they have it. The situation represented by this example and similar situations in hundreds of other disease areas is about to change rapidly.

With the foundation we laid in 2015, we are poisoned to increase our menu by the end of the year to approximately 3,000 genes, including just about every gene routinely utilized in medical genetics today. This will allow us to comprehensively cover the remainder of the narrow, pediatric, newborn, and metabolic disease areas, as well as including the long tail of other rare genetic diseases in our offering, effectively aggregating the world’s genetic tests into a single service.

In addition to serving the large number of people who suffer from these rare conditions, the breadth of this menu expansion combined with our $950 million to 1,500 price structure puts us in a strong position to serve the pay organizations, to serve as the pay organizations preferred partner of choice for inherited genetic testing and associated services.

Also worth noting, many institution is sending out for a large volume of their rare genetic testing needs, absorb the cost of these tests in hospital operating in departmental budgets, or cover them in part by grant or philanthropic funding. Our $950 institutional pricing across the spreads of offering will provide significant and immediate cost savings for that subset of clients. In addition, the many hundreds of rare disease advocacy organizations representing the many hundreds of thousands of patients will not have a partner in providing access to comprehensive, high-quality, truly affordable genetic testing services.

We’ve demonstrated in our model new content needs the more volume and we’re excited to see the impact this year’s content releases will have for our patients, providers, and payers alike.

2015 was an exciting year for volume growth at Invitae, importantly improving our thesis and more content leads to more volumes in our model. We delivered about 19,000 billable tests, representing a 400% increase over our 2014 volume with a demonstrable increase in volume subsequent to each set of content leases. We saw significant volume increase across all diseases – all disease areas following each major and minor content release, especially in cancer.

Importantly, our cardiovascular volume increased from around 3% to 4% in the months leading up to the October content release to 10% of total volume in the month of December. We are expecting to increase the volume serving the cardiovascular genetics population and count on increases in volume and subsequent growth for just about every disease area we launch in 2016.

In anticipation of serving pediatric patient populations, we’re presently adding the capability to receive some other samples with the added benefit of better serving remote clients and centers without easy access to buy any services. Both existing and new clients continue to respond favorably to our comprehensive, high-quality, affordable offering, and we absorb there’s plenty of untapped potential in our core market.

We plan on increasing our field sales effort to 30 reps in the first-half of 2016, up from 18 reps active at the end of last year. Our early experience with the recent menu expansion combined with our content plans for this year lead us to expect somewhere between 50,000 and 70,000 deliver tests for 2016.

On reimbursement in cash, the last and trailing of our four key metrics, we continue to make progress and point to this year as a turning point. By the end of 2015, we had signed six payer contracts, including Capital Health, SelectHealth, State Health Plan, and Blue Shield of California. We also signed an agreement with the Blue Cross Blue Shield Association, a key for step in finalizing with the individual Blue Cross Blue Shield plans were in network status.

At the end of the year, we had signed 41 institutional contracts, and in January of this year, we have added another 10. We have submitted our data package for the CMS technical assessment for next generation sequencing panels in which we would point out that we are one of the first companies to go through such process with CMS for next-generation sequencing tests used for inherited genetic testing.

Modest wins with third-party payers this year in combination with our institutional and patient paid sample volume should put us in a position to crossover to positive gross margins by the end of the year and begin using our volume as a key driver to positive cash flow.

We view 2016 as a pivotal year for Invitae, building on the foundation laid in 2015. We will continue executing against our core measures of success with a goal of exiting the year as a leader in the medical genetic testing markets, demonstrating the strength of our core strategy and capabilities and showing a clear path to positive cash flow with a continued success of our business model.

I’ll now turn the call back over to Randy to cover our plans for the next phase of our business model in 2016.

Randy Scott

Thanks, Sean. As we look forward to 2016, we are also excited about new business opportunities to manage genetic information on behalf of patients in a network patients, physicians, and researchers in a way that will advance our knowledge in genetics and pave the way to more precise medicine.

Our first effort in this field will be the pilot launch of our adult prevention program as a new patient pay product this spring with a small number of leading medical institutions, Invitae would pull from the best of our current content, including the most common actionable genetic tests for cancer in cardiology, along with several other test of importance for preventive health to offer one of the first medically responsible adult health prevention panels.

As always, we will provide this prevention panel through the medical community, while working with both patients and physicians to appropriately educate them on the differences between diagnostic testing and symptomatic families versus genetic testing of healthy individuals. Our panel will consist of key actionable genes that the American College of Medical Genetics and others have identified as playing an important role in patient’s health.

We believe the future of many common diseases, such as cancer and cardiovascular disease lies in better prevention. And we plan to begin our efforts with a view that someday everyone in a modern healthcare system will view genetics as a standard component of their health and wellness for preventive medicine.

Throughout 2016 and 2017, we plan to add not only adult preventive genes the carrier status for recessive trades and pharmacogenetic information as well. As our costs come down, health and prevention has the potential to play an important role and are derived to positive cash flow. This effort is one of the first steps toward a long-term vision that a network of millions of individuals sharing genetic information will be a powerful force in healthcare. And through our relationships with individuals and their physicians, we will be able to provide increased value not just to our customers, but to our shareholders as well.

With that, we will open up the call for questions.

Question-and-Answer Session


[Operator Instructions ] We will pause for a few moments to compile the Q&A roster. And your first question is from Doug Schenkel from Cowen and Company.

Doug Schenkel

Hey, good afternoon, and thank you for taking my questions. Most of what I’m going to focus on is really just related to some of the discussion around expense control and volume ramp. So the first one is, when you compare the annualized Q4 run rate and volume with your full-year 2016 volume targets, I think, it’s easy for one to conclude that volume and revenue are going to be pretty back-end loaded in the year. You talked about cutting non-COGS operating expenses over the course of the year, and I think in the second-half, you said it was actually going to be down year-over-year. Just to be clear, is this as a percentage of sales, or is this an actual dollars? I’m just trying to get a better handle on how this works especially as you’re ramping volume and revenue and as you move into new areas such as cardio, neuro, and pediatrics amongst others?

Lee Bendekgey

Sure, Doug, this is Lee. In terms of the non-COGS operating expenses, this is – we’re not talking year-over-year, we’re talking quarter-to-quarter. And we do expect to see slight declines in the second-half of the year, primarily by focusing our efforts and finding efficiencies outside of those efforts that are clearly volume related, I think, the important thing to note is that, we’ve never really said that that we’re going to cut our way to profitability.

We’ve as you know, really our model as we’ve always said, works at scale. And so the idea is to hold expenses as tightly as we can, while we get to the point where we’ve generated positive gross margins and then drive – continuing to drive volume to absorb those tightly constrained operating expenses. And that that’s the model and we’re becoming increasingly confident that it’s working with modest improvements across the board in our payer segments, we can get to those positive gross margins in the second-half of the year, and begin to drive down the burn fairly aggressively. So that’s the broad outlines in what we’re talking about.

Doug Schenkel

Okay. So various times in your prepared remarks you noted how you want your success to be measured. I mean, we heard this before, but you clearly are going out of your way to stress this. You talked about getting gross margin positive no later than Q4, as we just discussed, you talked about reducing operating spend in the second-half versus the first-half.

Clearly, there’s a lot of focus here by you and by investors on operating spend here and the progress that you’re going to make. And like you said how you want to be measured in terms of success to cut through this a bit. Is there a reason you wouldn’t be willing to provide just a specific range on how we should think about cash operating burn this year, I think it would be really useful for you to share this at a minimum if you’re not willing to do that. Could you, at least, tell us if you are expecting to burn more or less than you did in 2015?

Lee Bendekgey

Yes, the reason that we’re reluctant to provide specific models is because as you know, we’re in a really dynamic environment and cash revenue was a little tough to predict. I would say that overall, we’re expecting given our general guidance that that vol – that burn will be flat and then begin to decline you should expect that for the full-year burn will be less than 2015. But aside from that, it is challenging for us to give you a specific number right now.

Doug Schenkel


Randy Scott

Obviously, we’re really focused on contradiction. I think we’re particularly excited about our business. And the business model as we see a very clear path to continue to reduce COGS. I think the fact that we tripled the content in Q4 and actually had a reduction in cost of goods pretty unprecedented in our industry. And so we have a growing confidence in our technological capabilities. So our view right now is, if we can hold the non-COGS related expenses flat over the course of the years with reduction in COGS and incremental steady improvement in reimbursement, we’re going to crossover that threshold to positive gross margins. And this is just a pure volume game, but more volume we drive the more we lower our expenses.

So as we’ve often said, this is an Amazon like business model for genetics. And I think we’re seeing a lot of positive signs in-house we call it pound the rock, you’re familiar with the San Antonio Spurs just keep pounding the rock of doing what we do best and that it’s really going to pay off over the long-haul.

Doug Schenkel

All right. I would have thought out there you would use the Golden State analogy?

Randy Scott

Yes. Well, that’s a Golden analogy now, there’s a snowball…

Doug Schenkel

All right. One more and then I’ll get back in the queue. Is the expectation at the vast majority of your volumes are going to be derived from symptomatic patients, or do you think you actually can do more in hereditary risk?

Randy Scott

Yes, most of it is going to be symptomatic patients this year, and I would classify, both symptomatic patients and patients with substantial family history that would qualify us having kind of a family symptomatic history of disease. The adult prevention in some of the new areas and programs that we’re launching are things that we think are really going to influence volumes more towards 2017, 2018 timeframe, not in 2016. But nonetheless, it would be really important to that volume sort of driving growth in the next couple of years.

Doug Schenkel

Okay. That’s great. Thanks, guys.

Randy Scott



Your next question is from Tycho Peterson from JPMorgan.

Patrick Dennehy

Hey, guys, this is actually Patrick Dennehy in for Tycho. Maybe just on the test volume guidance, it’s a wider range next year, which understand given at the rapid growth curve. But can you maybe talk to some of the key swing factors in that 20,000 tests range, what moves you to the higher end, I mean, the ramps productivity for the new reps is that the biggest swing factor?

Randy Scott

Yes, it’s not so much the rep productivity. All of our forecasting on volume is really set into our content release. And so, kind of, when we get the – we get the genes, we get the capabilities in the production, and then we start putting it into operation and for commercial offer for requisition and sign out. And the cadence that we should do that and the uptake is what we think of when we start thinking about the different – pushing through different volume ceilings throughout the year.

So it’s really based on when we expect the content to come out and then again given what is – given our moderate sales and marketing expenditures, where and when we expect uptake to come on that. And then there are certainly some swing factors not so much related to rep productivity, but more ancillary accounts in the cancer space, for example, whether or not we get some spill over from our core segment into [indiscernible], the shape and feel of the cardiovascular markets and the neurology markets that there are – all of these are very – we think we can drive a lot of volume in our core accounts genetics and genetic counselors. But we also are pretty excited about the opportunity to serve institutional clients. And that that kind of uptake, that’s the kind of non-lumpy uptake, it really swing it one way or the other and does the width of our range.

Patrick Dennehy

Okay. And then maybe just expanding on one of Doug’s question. I mean, when we think about that 50,000 to 70,000 tests range next year, I mean, how should we think about volume from each market, and maybe being a little clear, I mean, how large will cancer be the percentage of test volume and how does that compare to 2015?

Randy Scott

Yes, that’s a great question. We expect based on our Q4, obviously, we grew 40% quarter- over-quarter. We did see some pretty significant jumps in the non-cancer space. But the majority of that growth still was coming out of cancer. So we see cancer growth continuing to grow very significantly. We’ve got really comprehensive offering now in cancer. Our brand is growing within the medical genetics and GC community and we are starting to see spillover into other of those groups as well.

So you’ll continue to see cancer as our biggest component of our sales. But as Sean said, we ended December, I think, we had 10% of our volume was in cardiology up from 3% to 4% in the summer month. So that’s pretty exciting to see almost a tripling the first quarter after launch of our cardiology program.

So you’re definitely going to see non-cancer growing significantly. And, of course, the vast majority of our content release in the coming year will be in the non-cancer space. And that opens up the fields of pediatrics, neurology, we’ll have much more comprehensive offerings in the first-half of the year and those will continue to grow in the second-half. So you’re going to see non-cancer become an increasingly more important part of our business over the course of the year. We haven’t tried to put specific numbers, I think, we’ll just will learn more and more about those markets as we grow.

Patrick Dennehy

Great. And then maybe just one last one, obviously, competition continues to increase the market. Can you maybe just talk little bit about the competitive landscape, and if you feel like for this and we’re seeing how differentiated your product is?

Randy Scott

Yes, like Sean mentioned – talked about that as well, but we love competition, because we think we’ve just got a great lineup. We think we have some of those most comprehensive content on the market with the highest quality and the lowest price.

So I think that brand is really starting to connect in the marketplace. If – we just had our National Sales Meeting right at the start of this year, right before JPMorgan. And I think everyone of our sales reps would tell you that when they go out into a sale there leading with the mission, and that is that we are providing more affordable, high-quality genetic testing for patients and physicians. And given the frustration of the medical community over the high cost of healthcare, the frustration of dealing with payers, the sort of soaring prices for stack codes for genetic testing, we’re finding a great deal of receptivity there.

So this is probably the first quarter what I – where I felt like the investment that we made in sales and marketing and we attended a lot of conferences and had a big push last year. And I think that brand marketing is starting to really begin to pay off in the marketplace. Sean, you want to get me more color around…?

Sean George

Sure. I think just kind of more generally one macro trend worth noting, this whole industry historically has been fairly fragmented and kind of a single or maybe one or two leaders in each niche. One thing worth noting is, competition has ramped up, so have decision points in our client’s mind. And so, it actually an opportunity.

In every disease area we’re in, there’s a different consolation of competitors that we face, whether it’s cancer, or neuro, or cardio, or pediatric. And with the increased activity and excitement in the space, in particular, driven by, what I would say is the power of our model, it’s the power and simplicity of our model that kind of catches our client’s imagination thinking about the future.

A comprehensive, high quality, affordable test menu is something we think we can take into every single disease area and serve this well in all of them. And so it – I would, absolutely, there’s a lot of competition. It’s different in every disease area, highly dynamic. And in all of it, our value proposition kind of cuts through is something that everybody can really grab onto and understand us where this industry is going and how it’s going to grow in the future.

Patrick Dennehy

Great. Thank you very much.


The next question is from Amanda Murphy from William Blair.

Amanda Murphy

Hi, good afternoon. I guess I had another follow-up to Doug’s earlier question. I know it – there’s a lot of moving parts here. But I was just curious, if you can help us frame how to think about recognize revenue versus billable revenues for 2016? So, I guess first, you mentioned an 800 ASP, is that the right way to think of kind of at end of your target based on where you expect volumes to come from? Or is there and I apologize if you have said this, but is there a way to think about accruals as a percentage of revenue by the end of the year, or any kind of metric to think about scenario than what recognized revenue might look like for 2016 based on where the volume is coming from?

Randy Scott

Sure. I guess what I would say in terms of revenue recognition is that, it will certainly – the accrued revenue will certainly grow over the course of the year. It will start with some of the major institutional accounts, I would say. And in general institutional, our accounts have accounted for 15% to 20% of our business recently. It’s possible that that will grow, as Sean mentioned, with the expansion of a test menu.

One of the big efforts underway will be to go to send out desks at major institutions and try to grow that. But for now, I would say that thinking about the institutional customer base as being the first source for accrued revenue. And then also during the course of the year, perhaps some of the smaller payers that we’ve been in contract with for a while. So, I don’t anticipate that accrued revenue will be anything like a majority of our revenue by year-end, but you should see it steadily grow over the course of the year.

In terms of an average dollar revenue per test, again, what I would suggest that you watch for a steady improvement. Over the course of the year, the $800 number I used was really exemplary. And the key there is not so much to the particular dollar figure, but to assume a crossing of the COGS line and the revenue line per test in the second-half of this year. And once we get there, both the dollar per test number will grow and the growth in the volume will allow us then to accelerate the reduction of the burn.

So it’s really that. And I guess one way of thinking about it is that given what we’ve said about gross margins and given what we’ve said about COGS, if COGS are somewhere between 4 and – per test or somewhere between $400 and $500 per test by Q4, and we’re anticipating positive gross margins than what you would expect to see over the course of the year is steady improvement across all three customer segments, yielding an average revenue per test of something north of $500 per test at a minimum that would then start to eat up the burn.

Amanda Murphy

Yes, that makes sense, okay. And then I had another question on payers. So you mentioned the 41 contracts – institutional contracts and then you mentioned the private payer coverage you have. So is there a way to think about magnitude in terms of how many contracts you might expect to have by the end of 2016, both on the institutional side and then maybe thinking about it in terms of covered live on the private payer side exiting the year?

Randy Scott

Yes, we’re – probably not going to give any specific concepts here. But most of those institutional contracts were all put in place last year, we had 41 for the year, we had 10 in the month of January. So you can see we’re getting a fair amount of institutional interests.

As you move to the pediatric, our expansion to a 1,000 genes in the first-half of the year, our belief is that and the belief of our sales and marketing team is that a lot of that volume does lie in the institutional field, where historically it’s been more academic and a lot of that was sent out to academic institutions that didn’t do a third-party payment.

So our expectation is that, there’s a lot of potential upside in the institutional market, and of course, that’s across North America and ex-U.S. as well. So we think there’s significant opportunity there. We haven’t tried to quantify it in terms of any internal goals of the specific number of contracts per month. We’re really just focused on going where the volume is in providing a really good quality service. Sean, did you want to…

Sean George

Yes, I think that’s right. I think it’s difficult to forecast kind of the institutional pick up, it looks to be accelerating as – for the numbers we gave. We do a lot of business with institutions without contracts at higher prices. And so it’s really kind of, I think, that’s why we don’t guide to a number of institutional contracts as a relevant measure of our success there. But, again, with our content and menu expansion, we’re excited to see what that looks like this year.

Amanda Murphy

Okay. And then just last one and I’m sorry, if I’m re-asking the same question. I just wanted to make sure, it’s clear. So in terms of the volume guidance that you gave for 2016 and the ramp in sales rep figure still effectively targeting kind of a genetic counseling institution – institutional markets vis-à-vis moving into primary care or oncology, specifically, is that the right way to think about it?

Sean George

Yes, that’s correct. I think as we’ve stated we think in that core segment there’s a lot of volume across many disease areas, which is – would allow us to keep the kind of relative sales force effectiveness much, much higher than industry standards that will – it’s also important for us to continue establishing our brand as a very important medical brand across all genetics. In that we see plenty of upside and well, we probably will occasionally talk about the spillover into some of the specialties if that really is going to remain the focus for this year.

Amanda Murphy

Got it. Okay. Thanks very much.


The last question is from Dan Leonard from Leerink Partners.

Kevin Chen

Hi, this is actually Kevin Chen in for Dan. Thanks for all the color on the COGS. So as you rollout the pilot in your management program, how should we think about the associated COGS at that part of the business, or is this too early?

Randy Scott

Yes, the good news is that all of the content, I’ll call it kind of the greatest hits of Invitae, all that content is currently embedded in our current products. And so we’re not doing anything new. It simply repackaging content, and I think there’s a very bright future as we get upwards of 3,000 genes in production to been able to package content in different ways for different audiences.

So whereas, historically, that’s been positioned for specific markets in symptomatic disease like oncology and cardiology. We can now repackage that same content into a new marketplace for health and prevention, which of course really is a different set of physicians and it’s a different type of patient.

And so this year we’ll be piloting – this was a medical institutions, where the focus is really on the – generating a quality experience for that group, and educating both the physicians and the patients on what genetic information means to a healthy individual. But we think ultimately, that opens up a really substantial market over the next couple of years as it becomes more and more common for individuals to want to be able to get access to low price affordable genetic testing for health and prevention.

Kevin Chen

Okay, thanks. And there’s a gap between the billable in accession this quarter that was a bit wider than usual. Can you give us some color there, was that seasonality, or are there one-time factors in play there?

Randy Scott

That’s usually when you see that, when you see a larger accession number than a report delivered number, that’s usually a signup growth that basically represents samples that came in towards the end of the quarter. As you – I think, we have a standard turnaround time of under three weeks for the majority of our tests. So samples that come in, in the last couple of weeks don’t get reported out. So that’s really what that delta represents.

Kevin Chen

Got it. Thank you very much.


That was our last question. I will now turn the call back over to the presenters.

Katherine Stueland

Great. Thanks, everyone. We look forward to seeing you all at upcoming Investor and Medical Conferences starting with Leerink Partners this week. So thanks for joining us today and have a great night.


This concludes today’s conference call. You may now disconnect.

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